How did EDS lose $8bn in value in four years?

HP is writing off $8bn after the drop in value of EDS, which was acquired in 2008 - how did the outsourcing business fall so far so fast?

HP has confirmed it is writing off about $8bn after the drop in value of EDS, as the result of internal decisions combined with the global economic climate.

Earlier this month Hewlett-Packard (HP) warned that it would write off $8bn after the business it acquired in 2008 for $13.9bn, was devalued.

HP confirmed the reduction in its latest financial results, for the third quarter of 2012. 

The EDS downgrade contributed most of the $8.9bn loss, but was increased as a result of a 5% fall in sales.

But how could EDS, a pioneer of IT services with a list of customers the envy of every IT company on the planet, lose value so quickly?

The loss of experience, a drive to get cash quick, a lowering of service levels and a commoditisation of IT have all contributed, say sources.

Business damaged

One former executive, who was let go by Hewlett-Packard, says the loss of the skills and experience when HP made redundancies has damaged the business. “The point about EDS was the talent held it together,” he says. Staff had strong relationships with customers which was different to HP’s attitude.

“When HP first bought EDS and did due diligence, it was keen to make sure everybody transferred. But then it made thousands of job cuts to raise cash.

EDS before HP

Set up the US in 1962 by Ross Perot, Electronic Data Systems (EDS) was an information technology equipment and services company. It began providing large corporates with skilled electronic data processing management personnel and computer equipment. In 1984, General Motors acquired EDS for $2.5bn before launching it as an independent company in 1996 and becoming one of its largest clients.

“When you lose talent in a services business, you have a different company.”

He says the fact that many of the former EDS staff, known as EDSers, have moved onto top jobs throughout the IT services sector is evidence of this. “EDS had strong external relationships with customers and governments built on long-serving personnel with a focus on customer service.”

While the loss of key staff played a huge role in the demise of EDS, the source says, it is a lot to do with contradicting attitudes to quality of service.

“EDS had its problems, like most IT companies, but their attitude was to deliver exceptional customer service. HP was of the attitude that ‘if we are the big enough, we set the standard'.”

He said HP’s investment strategy has meant EDS has been starved funds essential for it to prosper. “What worked was maintenance of a portfolio of large scale ITO/BPO which provided the backbone cash for the business to keep the investments current in terms of datacentres, resource centres and offerings. Then, strong applications and business performance pulled up the profitability, often as add-ons,” he says.  “I think HP diverted a great deal of the cash-flow away from the business and into the investment fund for buying other businesses.”

Short-term focus

Jean-Louise Bravard, director at sourcing consultancy Burnt-Oak Partners, previously headed up EDS’s financial services business globally. He says there are three main reasons the EDS business has lost value.

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Number one is a focus on short-term revenues rather than building customer relationships for the long term. ”If you try to milk existing customers for more cash, you quickly lose focus,” he says. A related reason is losing staff that had good relationships with customers.

Another key part of the demise of the business value is a misunderstanding of BPO, says Bravard. “HP misunderstood BPO because it thought it was an IT service. It should be run like a business with constant investment but HP does not think this way.”

Bravard adds that HP’s IT focus combined with the commoditisation of IT has also had an effect. “HP is more focused on the IT than the business, but it should be a mix of the two.”

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner says a more appropriate question to ask is: How and why did the EDS acquisition destroy so much value in HP? From the outside, it is a combination of internal and external factors, he says.

HP didn't really know what it was taking on and how it would digest and grow value in EDS, it overpaid, there was ineffective integration, economic changes since 2008 and HP has seen a great deal of turbulence at the top with an unclear direction.

Professor Ilan Oshri at the Loughborough School of Business says HP’s problems, in IT services, run deep and it will struggle until it finds its positioning or it could become a minor player. “EDS is stuck in the middle. It does not have an efficient off-shoring model like the Indian players that helped them position themselves around the cost-saving proposition and it is not near the value-adding proposition through innovation offered by sophisticated suppliers such as IBM.”

HP is a company in turmoil. When it acquired EDS in 2008, its success seemed guaranteed. But the combination of external factors, allegations of bad integration practices, technology transformations and economic turmoil have made EDS a thorn in HP’s side.

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